This past summer I was a research analyst intern at Superior Manufacturing Group or SMG. SMG is a family owned business that manufactures premium, rubber floor matting and other various rubber products. My primary job was to do competitive price reviews and assist their marketing team but I was hired at a very special time for SMG. I was lucky enough to witness first hand a private equity firm acquire Superior Manufacturing.
Whilst experiencing the entire process I was required to avidly research Audax, the private equity company, as well as learn about the benefits of acquiring other firms. Essentially, Audax seeks out companies with high potential but ones that either don't have the funds to get to the next level or are mismanaged. Audax will then buy out these firms and implement a system that will cause the acquired firm to appreciate in value. In the end, Audax can reap the benefits of the newly managed firm or sell it for more than they initially paid.
Clearly, both parties are benefiting from this transaction. The owners of SMG are getting paid top dollar for their company, granted they negotiate well, and Audax is adding a high potential company to their portfolio. There are potential negatives to this transaction. If Audax realizes that a company they are acquiring is seriously mismanaged then some workers will be laid off and replaced. There is also potential for the company that is being acquired to not be completely honest with Audax, in an attempt to get offered a higher price. Complications such as this create an elongated due diligence period and waste time for both parties.
Organizations interacting with one another deal with transaction costs at all times. Ultimately, both sides aim to minimize these transaction costs in a way that both parties receive benefits. However, transactions costs can be found in more than just business settings. Any expenses incurred while reaching a deal or agreement can be defined as a transaction cost. This can occur in all facets of life and is a key term within economics.
This sounds like an exciting experience, working at a company that is about to be acquired. But I thought you could have tied the research work that you were assigned better to the decisions that SMG was about to make. Did SMG care about other aspects of the deal than the price in the tender offer? If so, what were those other aspects?
ReplyDeleteOne of the things I don't fully understand about private equity ventures particularly when they acquire manufacturing firms is how technical expertise is handled. The private equity firm has mainly MBA and Finance types. The manufacturing company is likely run by a bunch of Engineers. Is their expertise maintained post acquisition or is it lost? The private equity firm improves the balance sheet, as you suggest. But does it hurt the technical aspect of the business in the process? And does the ownership of the manufacturing firm pre-acquisition care about that or not.
On a more minor point, read the first and third sentences in what you wrote that I'm excerpting below. They contradict each other. Could you write this in a a different way to better get your meaning across?
"Clearly, both parties are benefiting from this transaction. The owners of SMG are getting paid top dollar for their company, granted they negotiate well, and Audax is adding a high potential company to their portfolio. There are potential negatives to this transaction."
That's a great point. SMG did care about other aspects during the process. Being a family owned business many family members held higher up positions within the business. Insuring their jobs definitely played a roll in the negotiation process. Luckily, it seems that SMG will be left unaltered for the remainder of the year. This is partly because many of them are in fact engineers and Audax hasn't been around SMG enough to just start running it without their help.
DeleteIn most cases I could see the owner that is selling not really caring what happens to the business as long as they get paid. In this case, they do care. This business was founded by the presidents grandfather, and had been previously ran by his father. Their his a lot of family history in this business and they were not going to sell it to a private equity firm that didn't already have successful manufacturing company's in their portfolio.
With regards to the excerpt you posted, I meant to highlight that there are both positive and negatives. That last sentence could read, "Although both parties benefit from this transaction, there are potential negatives"